Federal Funding Flexibility: Use of Federal-Aid Highway Fund Transfers by State DOTs (2022)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

1   The Federal-Aid Highway Program (FAHP) is one of the largest grant programs in the federal domestic budget, over $43 billion in federal fiscal year (FFY) 2020. Federal funding for highways under this umbrella program has been historically dominated by grant-in-aid programs structured to achieve national transportation goals, such as construction of the Interstate, through state actions. Over time, this program has evolved to comprise a mix of broad funding programs akin to block grants to improve classes of highways as well as relatively narrow categorical programs for specific transportation purposes. Inherent in this partnership is the balance between national priorities, represented by federal funding provided for individual program components, and the authority of states to choose how to apply that funding to meet national priorities and to satisfy locally driven priorities and transport needs. With the diversity of travel and transportation infrastructure across the nation, for example, in terms of demographics and land use, the national distribution of funding across categories does not universally match needs within each state. Thus, an important feature of the design of the FAHP is the ability provided to individual states to shift and use the initial distribution of funding among the categories to better match their needs. These provisions allow flexibility in the use of funding categories through the transfer of funds between programs within the FAHP as well as fund transfers with surface transporta- tion programs administered by other federal agencies, most commonly the Federal Transit Administration (FTA). To put this in perspective, from FFY2013 to FFY2020, transfers among FAHP programs ranged from $2.5 billion to $4 billion annually. In addition, an average of $1.83 billion annually was transferred out of FAHP programs, with 91 percent of that to the FTA. This research project analyzed FAHP transfers over the period from FFY2013 to FFY2020 and investigated the practices and policies related to fund transfers through surveys, case studies, and transportation industry workshops. The research team focused on the recent past as the funding categories and their relative size over time have changed significantly and thus have a strong influence on the need for and use of fund transfer provisions. The research goal was to document use and build a better understanding of the reasons behind current use of the fund transfer provisions. According to the financial data analyzed, the use of fund transfers is widespread, with every state and the District of Columbia employing the flexibility provisions, at least to some degree. However, the practices are unique to each situation, reflecting the specific mission, scope, goals, funding, and program needs of individual states. S U M M A R Y Federal Funding Flexibility: Use of Federal-Aid Highway Fund Transfers by State DOTs

2 Federal Funding Flexibility: Use of Federal-Aid Highway Fund Transfers by State DOTs The research identified two principal drivers for the use of the fund transfer provisions: addressing national and local policy goals and ensuring effective financial management. The most common policy-related fund transfers related to providing more funding to support safety, public transportation, bicycle and pedestrian, and air quality goals. Financial management transfers were used to optimize the funding opportunities provided to states through FAHP. For example, transfers were used to avoid the lapsing of funds at the end of their availability period, to avoid a lapse in obligation authority, to maximize the benefits of the annual end-of-year redistribution of obligation authority, and to minimize the impacts of potential funding rescission. For the most part the research team found that state trans- portation executives rely on their financial managers to achieve these outcomes. There is variation among the states in terms of the frequency and scale of use of fund transfers, and thus the familiarity with the provisions; however, most states appear to have been successful in using the federal fund transfer provisions as their fiscal situations warranted. The process for managing funding transfers varies significantly across the country. Some of the differences can be attributed to the relative participation by the state departments of transportation (DOTs) and the metropolitan planning organizations (MPOs). This is influenced by the degree that states choose to suballocate various funding categories to the MPOs and their involvement in using transfer provisions. For example, some MPOs dedicate their allocations as a matter of state and local policies, whereas others use a com- petitive project selection process to guide funding decisions. In some cases, states assume full responsibility for managing all the funds and use transfer provisions to achieve fiscal and program management outcomes. The research identified several special considerations that affected FAHP transfer practices. • The capacity of local funding recipients to obligate funds and complete projects in a timely and efficient manner can affect states’ fund transfer decisions. In many cases, the timeliness of federal funding compliance and reporting requirements are challenging for the ultimate recipients to handle, along with unanticipated expenses. The result can be that funding to local recipients can lapse due to unanticipated project delivery delays. To avoid the consequences to the state in these situations, several states have implemented a fund “swapping” program, which provides local recipients with state funding rather than federal funding, reducing the impacts of the federal funding requirements on less-experienced ultimate recipients and protecting the state from negative consequences. Although the data did not substantiate a significant impact of state and local resources on fund transfers, some practitioners noted using state funds to supple- ment federal funds, affecting the amount of fund transfers. • Expectations that specific programs will be dedicated solely to specific purposes is a consideration related to transfers. For example, eligible uses for Congestion Mitiga- tion and Air Quality (CMAQ) and Transportation Alternatives (TA) funding categories can be complex and challenging to obligate and execute projects in a timely fashion. Negotiation and strategies that balance cash management of these programs with commit- ments to address program goals can be difficult to accomplish and communicate to local constituencies. • Achievement of performance and asset management targets has affected funding transfers. To meet targets in the short term, fund management strategies that include transfer of funding can be restrictive. For example, if there are a substantial number of bridges that do not meet federal standards or are in poor condition, transfers of bridge funding have been prohibited. In some cases, transfers of safety funding have been prohib- ited by the Federal Highway Administration (FHWA) Division Offices due to emphasis on achieving safety-related performance goals.

Summary 3   • A pipeline of projects ready to advance and positioned to meet federal requirements can facilitate transfers. This has been an advantage for some states in maximizing federal funding, particularly related to redistribution and rescission actions. However, some states avoid investing in the design of projects beyond immediately anticipated funding levels. In those cases, they avoid the risk associated with project plans that may “age out” or create public expectations for project delivery that would depend on unrealized funding. • Fund transfers to FTA are frequently driven by state policy objectives to support public transportation and meet air quality goals, enhanced by the experience of FTA in delivering transit projects. It was noted, however, that since transit projects can often be funded directly within FAHP funding categories, some transit projects can be supported without transferring funds to FTA. The flexibility provided by statute to help states apply federal program funding to address policy goals and maximize fund management is characterized by recipients as fundamental to delivery of state transportation programs within the longstanding FAHP construct. With rare exception, this capability is an essential tool used by DOTs across the nation. The Infrastructure Investment and Jobs Act (IIJA) continues these provisions along with significant increases in funding for existing programs. While the impacts of the IIJA and its funding structure and new priorities on transfer provisions are beyond the scope of this research project, it is clear that the ability afforded states to tailor federal funding to maximize its usefulness has been an important contribution to the success of federal surface transportation programs.